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Capitalism: Myth and Reality, Part 4... The Japanese Experience

Updated on January 8, 2015

Roots of Japanese Wealth

In Parts 1, 2 and 3 of this series, we have seen the importance of government intervention in the economic development of the United States, United Kingdom and several more recent East Asian success stories. Now we turn to the most important East Asian economic story, Japan, which has grown from an impoverished, agriculturally-based and feudal society to a modern leader in high technology and innovation, a powerhouse that today is the third largest economy on earth. Unguided free market activity were essential to this development, and so was the guiding hand of the state.


Japan: The Tokugawa Period (1603-1868)

From the early 1600s to the mid 1800s, the Tokugawa dynasty ruled Japan. This period was characterized by a rigidly hierarchical feudal system that saw samurai at the top of society, and merchants at the bottom. Despite the general disrespect for commerce on the part of the ruling elite, this period is noteworthy for several developments.

Firstly, because land and agriculture were seen as the primary source of prosperity, they were taxed more heavily than commerce, placing the latter in an unplanned advantageous position. As a result, the beginnings of a modern commercial and monetary economy arose even within a largely feudal society. Secondly, Tokugawa shoguns required the most powerful land-owning samurai (called "daimyo") from around Japan to regularly attend the capital of Edo, and to maintain residences there. The annual migrations of the wealthiest members of society spurred the construction of roads and highways, and stimulated economic activity in cities and towns across the country, especially given the social pressure toward conspicuous consumption for the daimyo.

Thirdly, the overall climate of peace and stability established by the Tokugawa shogunate created a fertile environment for economic activity along with advances in literature, culture and entertainment. And finally, Japan began a strong trajectory of urbanization and economic centralization during this time that would continue after the period was over.

Early in the period, the Tokugawa state sealed off Japan from outside influence, and permitted minimal trade with Europe and China. This isolationism had the effect of concentrating limited Japanese capital, resources and skilled labor domestically, nourishing the budding commercial economy (similar to the English ban on skilled labor emigration in the 18th century). By the end of the period, in 1868, the social hierarchy had been turned on its head: merchants had become the wealthiest Japanese, and the samurai (often indebted to the merchants), some of the poorest. The inversion of economic power laid the foundation for the revolution that brought the Meiji to power, even as it produced long term benefits for the economy.


Japan: The Meiji Period (1868-1912)

In the 1850s, the US Navy forced Japan to open up its trade, ending two centuries of isolationism. The new open attitude proved to be extremely positive for Japan. The Meiji sent students abroad to learn modern technical skills, and invited foreign instructors to help build an industrial workforce. The Meiji state generally embraced international trade and western models of governance and economic administration, and took an active role in development.

The late 19th century saw the abolishing of multiple currencies and the standardization of the single Yen currency; the establishment of a central bank; and significant state investment in industry, modern infrastructure, and agricultural modernization (still the majority of the Japanese economy), funded largely by heavy taxes on land. Private and public resources built over the preceding centuries enabled Japan to develop without the need for much foreign capital.

The government constructed telegraph and telephone lines, and created a postal system. By 1880, the government owned factories, mines, shipyards and railroads. It subsequently sold off most of these enterprises to private investors, who grew into the "zaibatsu" (plutocratic conglomerates) of the 20th century, and later into the "keiretsu" of the postwar period. Keiretsu today include Toyota, Mitsubishi and Sumitomo.

The state initiated industrial and shipping ventures, but as these produced losses, they were turned over to the private sector. Some have taken this as an indication that where the state failed, the market succeeded. Therefore it was private enterprise that is responsible for Japanese prosperity, not the government.

As we have seen by now, however, the government clearly was essential to the entire process. Moreover, the zaibatsu continued to work closely with the state in the early 20th century, and this is true to a degree even today with the keiretsu. Indeed, the close relationship between big business and big government has been a hallmark of modern East Asian economic success (seen with the chaebol in South Korea, for example).

Japanese surrender to the United States, 1945
Japanese surrender to the United States, 1945

Japan: 20th century

As Japan moved into the 20th century, it pursued imperial conquest in East Asia and the Pacific, seizing territory in Korea, northern China and Southeast Asia. The easier access to natural resources and raw materials (previously dominated by European powers) were considered important for Japan's economic self-sufficiency.

Industrial and manufacturing growth continued at a strong pace in the early 20th century. At the time of the Russo-Japanese War in 1904, 38% of GDP was still based on agriculture. But by the late 1920s, manufacturing and mining had risen to 23% of GDP, and agriculture only 21%. War spending in the late 1930s and 1940s rose tremendously, and largely benefited the zaibatsu. Nevertheless, World War II had a disastrous effect on the Japanese economy, causing rampant inflation, shortages, currency devaluation, massive shipping disruptions and the near total halting of industrial production.

After the war, the Japanese government restarted its investments in industry, infrastructure and education. Aid from the United States, primarily in the form of food, industrial materials and transportation equipment, helped the process of reconstruction and growth in the late 1940s and 50s. The American occupation also consolidated the democratic system, ending military rule.

A key component of the postwar recovery and miraculous growth was the high quality of the public education system. Japanese education produced some of the highest literacy rates in the world and a highly skilled labor force that fed productivity gains and benefited the secondary and tertiary sectors of the economy.



State involvement in the economy was relatively limited in the late 20th century. But as we have seen, the state had already laid the foundations of prosperity over the previous 200 to 300 years. Moreover, the Japanese government continues to coordinate more closely with big business than is typical in other developed countries. State-funded primary and secondary education, infrastructure projects, central banking and currency management all remain essential aspects of government economic management. Like Great Britain and the United States before it, Japan embraced state intervention as essential to economic development, and has reaped the rewards.

The story of capitalism has been more complex than many believe. Protectionism, subsidies, tariffs, government-run corporations, isolationism, currency manipulation and trade restrictions have all played important roles in the development of today's rich countries. In the proper time and place, they have proven to be just as important as free trade, private enterprise, floating currency, and the lifting of trade restrictions. Myth and reality don't always match up.


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